Talk Talk Talk September 2005

Features
TALK TALK TALK

Charles Frank, banker turned property developer, is one of the two men behind the Anador Center, a mall bordering Stefan cel Mare, due to open soon.

September 2005

Vivid: You have a long-standing relationship with Romania. You were here for the first time in 1980. Why were you here then?

Charles Frank: The first trip involved Salomon Brothers, for whom I worked at the time. We were asked to make a presentation on how we could advise the Romanian government on rescheduling its debt.

Which was how much at that time?

I don’t remember; it wasn’t in today’s terms a very large amount. It was probably a billion or two, which was big enough for the 1980s, and big enough for Romania at the time.

Owed to dozens of different governments and banks, right?

Yes. In fact we spent four hours with Ceausescu, in which he lectured us on how he wanted us to lend him money at one per cent, and if we did that we would have a deal. Of course we weren’t willing do that. Then he decided that he was going to starve the Romanian people by squeezing enough food and other things out of the country, which is too bad. Romania would have been better off if he had rescheduled the debt.

What else do you recall about the meeting with Ceausescu?

Ceausescu talked almost continuously for the four hours. We were able to get in a few words here and there. He talked mostly about Romania’s foreign policy and not about economic issues. He bragged how Romania was a leader in the fight against nuclear proliferation and in challenging Russia’s dominance in Eastern Europe. For these reasons, he felt that the United States should be supportive of Romania’s foreign policy aims. He argued that the US should continue to grant Romania most favoured nation status in foreign trade relations. He seemed much more interested in using our visit to score political points rather than to deal in a realistic manner with the problem of Romania’s foreign debt.

And I guess the people looked fairly unhappy.

It was a gruesome place at that time, at least it seemed so to me. It was December 1980, it was cold; there was very little heating in the buildings. There was very little light, nothing in the shops, nothing in the restaurants.

Romanians looked fairly grim, and everyone was afraid - afraid of their neighbors, afraid of their friends, afraid even of their own family members. People didn’t like to talk. And if I was seen talking to someone, they could be sure that they would be visited by the Securitate later in the day. “What was going on, what was their relationship to me?” they would be questioned. It was a pretty drab place at that time, and everyone told me it just got worse, in the later 1980s. If it was bad in the early 1980s then I can just imagine how bad it got in the late 1980s.

For some time communism here didn’t seem to be such a bad thing. Crime was low. There was full employment, no inflation, food on the table. Ceausescu had created a system whereby people lived in a poverty they could afford. But towards the late 1980s things got really out of control. Your relationship with Romania is multifaceted, isn’t it?

Yes. Well, first of all I have a Romanian wife, which is a certainly a good thing. Once I met the state secretary in the energy ministry and told him that I had a Romanian wife, his reaction was hotzule (eng: thief). Romanian men do not like to give up Romanian women.

I have heard that before too.

Also, I joined the European Bank for Reconstruction and Development in 1997. And Romania was one of the countries that the EBRD invests in, lends money to, and makes equity investments in. When I retired from the EBRD in 2001, we started making investments in Romania in real estate. I am also on the board of the Romanian-American Enterprise Fund. I am on the board of Central Eastern European Media Enterprises, which owns the majority of ProTV. I am also on the board of Mittal Steel Romania.

Formerly known as Sidex …

Yes, it used to be called Sidex but is now called Mittal Galati. Lakshmi Mittal bought it several years ago. In a broader context, Mittal has been successful virtually everywhere it has gone, and particularly in emerging markets. If you look at its profitability, it is heavily weighted towards the less-developed countries, not towards the Western and highly developed countries. I was with the EBRD and we made a big loan to a steel mill they bought in Kazakhstan.

Which employed 50,000 people?

I don’t remember the exact numbers, but I think it was closer to 100,000 people.

How long ago was that?

This was around 1996-1997. Not only did they own the steel complex, but they also owned a lot of mines all around the complex. So there were a lot of miners that they employed. We tried to figure out some of the reasons for their success. So we invited the managers and administrators to come in and explain to us at the EBRD. Their two main points were that they knew how to work in an emerging market country. Most of their managers and administrators are Indian, and if you can make a successful business in a market as difficult as India, then you can have success just about anywhere. Secondly, what they would tend to do was insist on extremely high standards – safety standards, behaviour standards – and they would not engage in wholesale layoffs. Rather, what they would do is impose high standards on employees. If they showed up drunk for work, they were fired. If they stole a piece of steel or a piece of copper wire, they were fired. If they didn’t do their job, or if they were careless and not safety conscious, they would be fired. By imposing these high standards, they were able to get rid of some of the worst workers, keep the good ones, and in addition stop the leakage of money that comes from the theft of goods and materials. Sometimes workers would set up a separate company and siphon off goods from one of their factories into that separate company. And Mittal was able to stop that. These are the major reasons they were able to be so successful.

I guess they used that formula here as well?

I assume so, but I know less about the operation here, because I spent most of my time with them overseeing the Kazakhstan operation. Theft to varying degrees is a characteristic of many state-owned companies.

Do you know by how much workers numbers have been reduced since Mittal’s privatisation of Sidex? What other changes have been made there?

Yes, there are approximately 10,000 fewer workers, a result of the implementation of a voluntary retirement scheme and natural attrition. There have been many other changes, some of which include an increase in annual output from 3 million to 4 million tons of steel, the elimination of sales through multiple traders and the integration of those sales into the global marketing network of the Mittal Steel Group, and an increased focus on domestic market with more timely delivery of products and credit sales, and a reduction in barter business.

Tell me about Anador Center.

Anador Center is for me a really exciting investment opportunity, because it is 11,000 square metres of land in the centre of the city. You don’t find that very often. I was introduced to it by Lucian Gelehrter, a Romanian-born, Israeli citizen, who came back to Romania and bought Getax, the taxi company. When he sold the taxis, he kept the land, which was used as the taxi depot, and the land is now the site for Anador Center. Luician is a friend of my wife’s family, a friend of my brother-in-law from childhood. And we have seen him in Europe and America, and have kept up the relationship for over fifty years. He is someone that I knew and trusted.

So what happened to Getax?

His concept was to take Getax and sell the taxis to the drivers, and now they provide the drivers with a dispatch service. So they no longer own the taxis, they no longer have responsibility for them. We are in the process of converting the two very large garages into Anador Center. The area was used originally as a depot for horse-drawn trolleys in the nineteenth century, then buses in the early part of the twentieth century. In fact, they used to keep horses on the property and only more recently did it become a taxi depot.

And now you’re turning it into a shopping mall. Are any part of the original structures being preserved?

If you look at the site, it has a very interesting history, paralleling the history of the city and how it operated. The buildings there are very beautiful. Beautiful structural ironwork, and we are preserving that part of the building, but completely rebuilding the walls and ceilings, and putting in sprinkler systems. Fixing the building up in a first-class kind of way.

The property is very centrally located, more so than some other comparable developments.

We are trying to keep it as a low-density development in the middle of the city. We will have 160 parking spaces, and interspersed will be trees and shrubbery. We will make it green. For the most part, it only has one storey. There is a mezzanine floor over part of it, but most of the shops are on the ground floor, which to me is a real plus. It is not a large mall. There will be about 3,500 sqm of rentable space. We want to keep the shops there relatively small. We don’t want hypermarkets, no big supermarkets, maybe a mini-market. Other food and drink shops will be welcome. We call it a ‘Food and Fashion’ mall. On one side there will be the food and drink shops and on the other there will be the fashion retail, including clothing for women, men and children, shoes and other items. We have a retail contract with Carturesti, which is the bookstore on Magheru, to place a branch there. That will provide a nice, relaxing atmosphere for the people of the neighbourhood to browse through the bookshelves.

It seems like you have taken the time to try to blend in with the neighbourhood. A lot of people criticise how you get a beautiful building like that and then right next to it a concrete block with no thought to aesthetics.

I think that is absolutely right. By preserving the original, beautiful structure and then fitting the shops inside with a view through the skylight, we think that it will be a spectacular place for the people of the neighbourhood to come and spend time. We also hope that it will bring in people from the outside because of the parking. It is close to the tramline, almost at the intersection of Stefan Cel Mare and Str. Vasile Lascar. There will be a pedestrian entrance from Stefan Cel Mare and an automobile entrance from Vasile Lascar.

And what are you looking at for a completion date?

We are set to complete construction in September or October, and set to open in October or November. Bog’art is doing the construction and they are in full swing now.

And how is pre-leasing going?

Pretty well. We had to have some of the shops and outlets pre-leased as part of the financing arrangement. We are financing it with the Romanian subsidiary of OTP, the Hungarian Bank. They required us to have a certain number of tenant’s leases before we could obtain loans. We are leasing the remaining spaces now, and are picking up the tempo. We have either leased or are in process of leasing most of the shops. In addition to Carturesti, we have a lease contract with HelpNet Pharmacy and Finansbank is one of our tenants. Jolidon, a lingerie and swimwear shop is also there. We are also trying to mix well-known names like Jolidon and HelpNet with new names. For example, we are in the process of negotiating a contract with a very well known Italian retailer, with forty shops in Italy, and which manufactures some of its products in Brailia. It’s first foreign retail effort will be in Romania, and its first shop will be at Anador. Similarly, we are looking at a deal with a ladies knitwear firm that has outlets all over Germany. We are hoping to bring them in to have their first shop in Romania.

We want to be a place that people go for something new. It is not going to be the usual big mall where you see the same shops as at all the other malls. We’ll have a mix of some familiar shops plus some new ones. We also want to put in a gym, because everyone we talk to says there is a real need in that area. It is a densely populated area, and there is a need in that area for a place for people to work out.

Do you know who you are going to go with?

I don’t know myself. We have just asked the real estate agency, Bastion, to do some research, and so far we haven’t talked to anybody yet. We have also just signed a contract with a company called Cegis, a French company that manages Orchidea and many of the Carrefour malls in France as well as here. They are going to manage our mall, and we are very happy to have them on board.

Rather like the Hilton would manage the Athenee Palace …

… same concept. But they are very professional, have a good contact list, and are experienced at managing malls. I don’t have any experience at managing a mall, nor does my partner Lu Gelehrter.

What architect did you use?

The architect is my partner Lu Gelerhter. We also used a company called Consco, whose principal owner is Dragomir Petre. They have some architects on staff, but the main architectural ideas came from Lu.

So this has obviously changed your view of Romania and Romanian real estate.

I was a modest investor in real estate in New York and Paris. Just in terms of returns, you make a lot more money in Romania and there is a lot more upside on the prices, and not a lot of downside. From a real estate perspective, I think that Romania offers great yields and substantial upside potential.